Where to find guaranteed bond + FTSE growth - safe capital?

ler01kjh

Hi,
I am looking for a investment opportunity, which combines a guaranteed minimum return, guaranteed safe investment, plus opportunity for greater return from FTSE movement.

My girlfriend had this sort of investment a few years ago with Northern Rock as it happens - a 3 year bond at 8% plus growth in FTSE.

Scarborough Building Society is offering a similar thing (http://www.scarboroughbs.co.uk/savingsandinvestments/products/gcpa.html#who)

Is there somewhere on the site which covers these sorts of products? If not does anyone have a suggestion for the best on offer at the moment?

dunstonh

Most of the retail versions of these products are a waste of money. Some of the institutional versions have been much better such recently but generally these products are not worth the cost of the guarantee.

Martin used to do an article on GEBs but stopped updating it after all of us here pointed out how bad the products actually were.

ler01kjh

Thanks for your message. But I'm not clear on why it would be a waste of money. I have seen products in the past which combine a GEB and high interest fixed rate savings. Doesn't this combine a reasonable return from the savings rate, and potential for significant investment returns without the risk?
Is there another product which offers these kind of returns at little risk?

Jonbvn

Hi,

They are so bad, since the return on the actual investments does not include dividends. If you take out reinvested dividends, you will find that most market indices perform quite poorly.

As an alternative you could look at Black Rock absolute Alpha fund. Currently up 7% YTD. (This is not a recommendation).

dwsjarcmcd

I understand (and actually agree) with the sentiment regarding the value of these, however, from a customer perspective, I can equally see why they may be attractive. They are a compromise product, giving very limited capital gowth at the same time as a potentially reasonable return via equity markets. These seem increasingly popular now as the markets are so uncertain. By way of a comparison, details of a product from the Leeds Building Society is enclosed http://www.leedsbuildingsociety.co.uk/savings/guaranteed_capital_account.html

dunstonh

I have seen products in the past which combine a GEB and high interest fixed rate savings. Doesn't this combine a reasonable return from the savings rate, and potential for significant investment returns without the risk?

They use the commission from the investment product to subsidise the rate. The actual investment product is rubbish.

however, from a customer perspective, I can equally see why they may be attractive.

Yes. They have some nice "sound bites" which inexperienced investors like to hear. Like no charges and guaranteed. Low charges is smoke screen. The products get no dividends which if you said 3% a year, then that is effectively a 3% a year charge. Also, there is usually a cap on the growth or you only get a limited percentage of the growth. When you work out that potential over the period then it typically offers very poor value.

They are also easy to sell by low skilled advisers and sales reps because of those soundbites. That is why they are popular with banks.

Take the Leeds one, 100% of FTSE growth over 6 years. You are totally reliant on an index that has historically been a very poor performer. It typically underperforms virtually every other index from a western economy. So, straight away you are limiting the potential. Then you get no dividends so that further reduces your returns.

The guarantee sounds attractive but the lose of dividends means you are losing out on nearly 20% over the 6 year period. So, compare that to a unit trust fund with no guarantee and dividends reinvested The unit trust could suffer a 20% loss in unit price and the dividends would cover that.

By building your own GEB by using the amount you would have put in the GEB and splitting it 50% into cash and 50% into an Equity Income fund (or any fund or combination of funds to suit your level) you have unlimited potentail on the upside and can afford to lose around 50% on the unit trust side and still break even over the 6 year term. Is a loss of 50% likely over a 6 year period, especially from the point we are at now? No.